Abstract

Market participants need to focus not only on the development of smarter algorithms for trading strategies, but also on the smarter use of these algorithms. The game between liquidity demanders and providers has changed over the last few years as the use of algorithmic trading strategies has increased for both types of market participants. We argue that the daily price, volume, and bid/ask spread characteristics of the market have changed, and that the game has reached a new “steady state” of interaction between liquidity demanders and providers. In order to minimize market impact costs, liquidity demanders must become more strategic and “noisy” in their choice of trading algorithms.